Fitch Assigns 'A-' Ratings to TTX Company; Outlook Stable

March 27, 2014 07:24 PM Eastern Daylight Time

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned an initial Issuer Default Rating (IDR) of
'A-' to TTX Company (TTX). In addition, Fitch has assigned long-term
ratings of 'A-' to TTX's revolving credit facility, unsecured
medium-term note program, and unsecured medium-term notes. The Rating
Outlook is Stable. Approximately $2.5 billion of outstanding notes is
covered by these ratings. A full rating list follows at the end of this
release.

KEY RATING DRIVERS - IDRs and SENIOR DEBT

The ratings and Stable outlook reflect TTX's unique competitive
advantages associated with its ownership structure and regulatory
exemption status, as well as its consistent operating performance
through various market cycles, strong liquidity given stable operating
cash flow generation, and solid capitalization and balance sheet
leverage levels. These strengths are counterbalanced by the cyclicality
of the rail industry, the reliance on regulatory exemption to maximize
the business model, and modest profitability.

TTX is a privately held corporation that provides a standardized,
free-running fleet of railcars available for use by North American
railroads. TTX's corporate structure, which Fitch views as utility-like,
is an important rating consideration because a significant number of the
major North American railroads represent the ownership group of TTX and
also account for substantially all of the company's lease revenues.
Fitch views TTX's relationship with its highly rated railroad owners as
providing it with various benefits including enhanced market information
and planning, increased efficiency and improved capital markets access,
among others.

TTX's fleet is subject to car contracts and pooling agreements approved
and authorized every 10 years by the Surface Transportation Board (STB)
of the U.S. Department of Transportation. This authorization permits TTX
the ability to operate as a railcar pool, providing railcars to its
ownership group in a more efficient manner than may otherwise be
achieved. The current authorization is scheduled to expire in October
2014 and the company is currently seeking reauthorization for a period
of 15 years. Fitch expects TTX will receive approval prior to this
expiry, particularly given that the company has previously been
reauthorized by the STB in 1989, 1994 and 2004.

Fitch views regulatory risk as material, should the STB not reauthorize
TTX's pooling authority or materially restrict its pooling activity.
Fitch's ratings incorporate an assumption that TTX is able to obtain STB
approval, but should this not be the case in the future, it could have
negative rating implications.

TTX sets its car hire rates at the lowest level required to achieve its
financial targets while maintaining and managing its fleet
appropriately. Since TTX does not aim to maximize profits, overall
operating performance is modestly weaker relative to peers, but this is
not viewed as a material rating constraint particularly given how rental
rates are set relative to capital expenditures and maintenance expenses.

Fitch expects overall revenues and maintenance expenses to grow in
tandem, as rail volumes and overall demand increase in the near to
medium term.

Fitch believes the company's depreciation policies are generally in line
with industry practices. While TTX bears some residual risk in the value
of its railcars, the long economic and regulatory lives of the assets
offset this risk and historically the company has disposed of its
railcar at a gain. Relative to other large equipment lessors, the risk
of fleet obsolescence is modest and the company has been able to adapt
its fleet as necessary to meet changing market dynamics and further
extend the useful life of its railcars. As such, impairment charges and
write downs have been minimal through time.

TTX's liquidity profile is considered strong given stable operating cash
flow generation through time and the ability to regulate capital
expenditures during periods of stress. Fitch views positively TTX's
consistent capital markets access, through the issuance of unsecured
notes, and to a lesser extent secured notes. Although TTX's debt is not
guaranteed by its highly rated railroad owners, Fitch believes the
relationship has indirectly benefited TTX's capital market access.

The company's debt maturity profile is well-laddered and available cash
on hand and cash flow generated from operations are viewed as sufficient
to repay upcoming debt maturities. Most recently, the company raised
medium-term notes in September and December 2013 at reasonable market
terms. The company also benefits from a robust pool of unencumbered
assets, which provides TTX additional financial flexibility in times of
market stress.

Fitch views TTX's capital base as being of good quality, comprised
primarily of retained earnings with no goodwill or material intangibles.
Leverage, on the basis of total debt to tangible equity, is solid and
has remained relatively stable through time, averaging 1.8x over the
last five years. Tangible equity is calculated by subtracting from
shareholder's equity, TTX's debt issuance costs and deferred tax assets,
net of allowance. However, cash flow leverage, on the basis of total
debt to EBITDAR, has averaged 4.9x during the same period and has
trended up over the last several years, as TTX increased capital
expenditures to replenish its railcar fleet to meet demand. The company
does not have an explicit dividend policy. TTX has only paid special
dividends to its railroad owners twice in its operating history, most
recently in 2000. In periods where revenues are in excess of its
financial targets, TTX may offer rate reductions, redeploy cash for
capital expenditures, increase maintenance expenditures or reduce
maintenance backlog.

RATING SENSITIVITIES - IDRs and SENIOR DEBT

Fitch believes positive rating actions are limited given TTX's monoline
strategy, the cyclicality of its business, its corporate structure, and
consequently the concentration of its ownership and revenue sources.
That said, modest rating upside over the long-term could be driven by a
more permanent regulatory exemption status, further improvements in the
diversity and credit quality of TTX's ownership group, a sustained
increase in U.S. rail usage/demand and continued conservative leverage
and liquidity metrics.

Conversely, negative rating actions could be driven by a material
increase in leverage levels or a failure to obtain on-going STB
authorization, which eliminates or severely restricts TTX's pooling
activity. Given the direct and indirect benefits TTX derives from its
ownership group, a decrease in the diversity and/or credit quality of
its ownership group could adversely impact ratings. Lastly, a reduction
in fleet utilization and/or an increase in impairments either of which
materially reduces cash flow or fixed charge coverage could also put
negative pressure on TTX's ratings.

Formed in 1955, TTX is a privately-held corporation based in Chicago,
Illinois. The company is a leading provider of railcars in North
America, with a fleet of approximately 150,000 as of Dec. 31, 2013.

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